Understanding employee benefits can be confusing.
Mixing life insurance makes it even more complicated, especially a split-dollar life insurance plan.
But it does not have to be:
Although this particular benefit is not so often offered to employees, the concept of how it works is simple. Once you understand that, you will be able to decide if a split-dollar deal is for you.
In this post I will go through the definition of split-dollar life insurance, how it works, how to terminate one if you already have a contract and much more.
What is Split Dollar's life insurance?
Split-dollar life insurance is not a life insurance policy. It is actually a type of agreement, usually between an employer and an employee, to share the costs and rights to share in the life insurance income if the insured (employee) dies.
These agreements are usually for life or permanent policy, and what makes them less appealing is how complicated they can be to structure and how they are taxed.
When dealing with a split-dollar life policy, you need to find out who will own the insurance, how the premium payments will be made and how the benefits will be shared.
How Is Split-Dollar Life Insurance Taxed?
If you (the employee) own the life insurance policy and your employer pays the premiums, it will be taxed as a "split-dollar loan, also called a security assignment using the loan system."
However, if the employer owns the insurance and provides you with insurance benefits, it will be taxed under the "approval agreement using the financial benefit scheme."
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How does split dollar life insurance work?
The majority of people choose one of the two ways below when arranging a split-dollar agreement; However, there is more than one way to make them work.
When your employer owns the life insurance policy
Our goal is to keep everything in "plain English" so I will do my best.
If your employer is the owner of the life insurance policy, but you are the recipient of the benefits, the agreement is considered a " approval agreement with the economic benefits regime. ”
Now you break these two things down looks like this:
In a approval agreement it is stated that you will have all insurance benefits signed for you or someone you appoint; however, the employer retains ownership of the policy.
The economic benefit part of this agreement refers to the fact that the IRS sees this type of split dollar arrangement as an advantage for you but not a loan. This means that the IRS will tax you on the value of the life insurance.
When you (the employee) own the insurance
If you will be the owner of the life insurance policy, but your employer will make premium payments, your split-dollar arrangement is known as " a security assignment using the loan regime . ”
A security assignment is when the insurance belongs to you (the employee), but some of the insurance benefits are awarded to your employer. This allows the employer to lend money to make premium payments without worrying about not being The part you log in serves as security for the loan. If you die or leave the company, the employer benefits will start and ensure that they are repaid.
A loan regime is about how the IRS will tax this agreement When your employer lends money, there must be some form of interest borrowed on that amount. How much tax you will owe depends on the interest rate that your bet giver gives you.
It will be up to you and your employer to develop an agreement and a process that works for both of you.
Is Split Dollar's life insurance best for you?
Although split-dollar life policies are less common due to a change in their tax treatment, your employer may offer them, but they can still be a valuable benefit to have, precisely when it comes to planning your property.
You may use these policies for:
the agreement and policy you choose.
How to take out split-dollar life insurance?
Split-dollar life insurance policies can be terminated by the employee's death or at a later date specified in the contract.
If the employee dies unexpectedly, depending on the agreement, the employer will recover the amount owed in loans and premium payments made under the insurance. all benefits to which the employer is liable will commence under the agreement.
Shared dollar policies are not that complicated in how they work. The hard part is finding out how they will be taxed and structured works best for you and your employer.
These plans do not work for everyone; However, make sure you always have life insurance outside of your employer. You can click here or on any of the above buttons to get some quotes and compare prices to get an insurance started.
Frequently Asked Questions
What is a split-dollar life insurance plan?
A split-dollar life insurance plan is an agreement between an employee and employer on how they share the death benefit and premium costs for a permanent or full life insurance policy.
What is one of the biggest disadvantages of split dollar plans?
For a business owner, they usually do not receive a tax deduction for their share of premium payments under a shared life insurance plan. There is also a chance that you as an employee may be subject to tax on the value of the benefits provided under the split-dollar plan.
Who pays the premiums in a split-dollar plan?
The employer pays premiums in a split dollar plan and is usually also an insurance owner. There are certain occasions where the employee may own the policy; however, for the most part, this type of insurance is offered to employees as a benefit.